Rising material costs, supply chain disruptions, and damage from climate change-induced storms and fires are resulting in rising rates for home insurance. From 2017 to 2021, rates were up on average some 11.4% which is a higher rate than inflation during that time. Insurance experts expect rates to stay high and think they are very likely to go up even more.
Mortgage lenders require borrowers to have a homeowners insurance policy, and the average homeowner spends about 1.91% of their household income on home insurance. We are fortunate here in central Ohio that fires, earthquakes, and hurricanes do not loom large in the insurance company actuarial calculations. Although dramatic losses caused by natural disasters are in other parts of the country, cost and availability of materials are affected here. The insurance companies also will raise rates regionally or nationally to mitigate insured losses in one market. Estimates of insured damage from tornadoes, hurricanes, severe storms, wildfires, and other natural disasters is estimated to total some $400 billion since 2017.
Most insurers focus on coverage for ‘replacement value’, meaning they will replace what was damaged. The replacement value for a historic home can be quite high, and in some markets may be higher than the market value of the home. This type of coverage is highly preferable to the alternative which takes into account depreciation and would therefore only cover the depreciated value of your home.
After a widespread natural disaster, there is a “surge” of demand for labor and materials, and prices spike immediately afterward and remain high for six to nine months afterward. Some insurance companies are offering an optional ‘extended replacement cost endorsement’ that covers this temporary premium which may drive the cost above ‘replacement cost’, often up to 25% over that cost.
Homeowners are usually reluctant to file claims for small items, expecting that the insurance company will raise their rates. With this in mind, it is reasonable to consider raising the policy’s deductible which will lower the annual premium. Other ways to reduce insurance costs is to bundle home and auto coverage, to improve the home’s security, to shop around for the best rate, and to make the home more disaster resistant.
